FIRST DIVISION

G.R. No. 216130, August 03, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. GOODYEAR

PHILIPPINES, INC., Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated August 14,
2014 and the Resolution3 dated January 5, 2015 of the Court of Tax Appeals
(CTA) En Banc in C.T.A. EB No. 1041, which affirmed the Decision4 dated March 25,
2013 and the Resolution5 dated June 26, 2013 of the CTA Second Division (CTA
Division) in C.T.A. Case No. 8188, ordering petitioner Commissioner of Internal
Revenue (petitioner) to refund or issue a tax credit certificate (TCC) in the sum of
P14,659,847.10 to respondent Goodyear Philippines, Inc. (respondent), representing
erroneously withheld and remitted final withholding tax (FWT).

The Facts

Respondent is a domestic corporation duly organized and existing under the laws of
the Philippines, and registered with the Bureau of Internal Revenue (BIR) as a large
taxpayer with Taxpayer Identification Number 000-409-561-000.6 On August 19,
2003, the authorized capital stock of respondent was increased from
P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00 each, to
P1,731,863,000.00 divided into 4,000,000 common shares and 13,318,630 preferred
shares with a par value of P100.00 each. Consequently, all the preferred shares
were solely and exclusively subscribed by Goodyear Tire and Rubber Company
(GTRC), which was a foreign company organized and existing under the laws of the
State of Ohio, United States of America (US) and is unregistered in the
Philippines.7chanrobleslaw

1
On May 30, 2008, the Board of Directors of respondent authorized the redemption of
GTRC's 3,729,216 preferred shares on October 15, 2008 at the redemption price of
P470,653,914.00, broken down as follows: P372,921,600.00 representing the
aggregate par value and P97,732,314.00, representing accrued and unpaid
dividends.8chanrobleslaw

On October 15, 2008, respondent filed an application for relief from double taxation
before the International Tax Affairs Division of the BIR to confirm that the
redemption was not subject to Philippine income tax, pursuant to the Republic of the
Philippines (RP) - US Tax Treaty.9 This notwithstanding, respondent still took the
conservative approach, and thus, withheld and remitted the sum of P14,659,847.10
to the BIR on November 3, 2008, representing fifteen percent (15%) FWT,
computed based on the difference of the redemption price and aggregate par value
of the shares.10chanrobleslaw

On October 21, 2010, respondent filed an administrative claim for refund or

issuance of TCC, representing 15% FWT in the sum of P14,659,847.10 before the
BIR. Thereafter, or on November 3, 2010, it filed a judicial claim, by way of
petition for review, before the CTA, docketed as C.T.A. Case No.
8188.11chanrobleslaw

For her part, petitioner maintained that respondent's claim must be denied,
considering that: (a) it failed to exhaust administrative remedies by prematurely
filing its petition before the CTA; and (b) it failed to submit complete supporting
documents before the BIR.12chanrobleslaw

The CTA Division Ruling

In a Decision13 dated March 25, 2013, the CTA Division granted the petition and
thereby ordered petitioner to refund or issue a TCC in the sum of P14,659,847.10 to
respondent for being erroneously withheld and remitted as FWT. 14 Concerning the
procedural issue, the CTA Division ruled that it was appropriate for respondent to

2
dispense with the administrative remedy before the BIR, considering that court
action should be instituted within two (2) years after the payment of the tax
regardless of the pendency of the administrative claim; otherwise, the taxpayer
would be barred from recovering the same.15chanrobleslaw

On the merits, the CTA Division found that the redemption of the 3,729,216 shares
issued to GTRC – which were then converted to treasury shares – was not subject
to Philippine income tax. The CTA Division elucidated that while the general rule is
that the net capital gain obtained by a non-resident foreign corporation, such as
GTRC, in the redemption of shares would be subjected to tax rates of five percent
(5%) and ten percent (10%) under Section 28 (B) (5) (c)16 of the National Internal
Revenue Code, as amended (Tax Code), the provisions, however, of the RP-US Tax
Treaty would also apply in determining the tax implications of the redemption of
GTRC's preferred shares because it is a resident of the US.17 It pointed out that
under Article 1418 of the RP-US Tax Treaty, any gain derived by a US resident
(i.e., GTRC) from the alienation of its properties (i.e., the preferred shares), other
than those described in paragraph 1 thereof, shall only be taxable in the US.
Nonetheless, the CTA Division remained mindful of the Reservation Clause19 in the
same treaty which provided that the gains derived by a US resident from the
disposition of shares in a domestic corporation may be taxed in the Philippines,
provided that the latter's assets principally20 consist of real property. After
evaluating the Audited Financial Statements (AFS) of respondent for the years 2007
and 2008, and noting that the value of its real properties – i.e., property, plant, and
equipment – comprise less than 50% of its total assets, the CTA Division held that
respondent's assets did not principally consist of real property and, hence, exempt
from capital gains tax under Section 28 (B) (5) (c) of the Tax Code.21chanrobleslaw

The CTA Division then determined whether the net capital gain derived by GTRC
would be subjected to 15% FWT imposed on intercorporate dividends under Section
28 (B) (5) (b)22 of the Tax Code. Citing the RP-US Tax Treaty, the CTA Division
noted that dividend income shall be determined by the law of the state in which the
distributing corporation is a resident,23 which in the Philippines' case, would be

3
Section 73 (A)24 of the Tax Code, defining dividends for income tax purposes as
distributions to shareholders arising out of its earnings or profits. Accordingly, the
CTA Division held that the net capital gain of GTRC could not be regarded as
"dividends," considering that it did not come from respondent's unrestricted earnings
or profits, as the records would show that it did not have any unrestricted earnings
from the years 2003-2009 to cover any dividend pay-outs.25cralawred Finally, the
CTA Division explained that there is only one instance in the Tax Code which treated
the gains derived from redemptions or buy back of shares as dividends, and this is
found in Section 73 (B),26 which contemplated the issuance of stock dividends. The
CTA Division, however, dispelled the application of this provision, considering that
the shares which respondent redeemed were neither stock dividends nor were they
redeemed using unrestricted retained earnings. In sum, the CTA Division ruled that
absent any law which specifically treats the gain derived by GTRC as dividends, the
same could not be subjected to 15% FWT under Section 28 (B) (5)
(b).27chanrobleslaw

Dissatisfied, petitioner moved for reconsideration,28 which was, however, denied in a

Resolution29 dated June 26, 2013. Thereafter, she appealed30 to the CTA En Banc.

The CTA En Banc Ruling

In a Decision31 dated August 14, 2014, the CTA En Banc affirmed the findings of the
CTA Division. Echoing the ruling of the CTA Division, the CTA En Banc found that
respondent was compelled to seek judicial recourse after thirteen (13) days from
filing its administrative claim so as not to forfeit its right to appeal to the CTA. Anent
the tax treatment of the redemption price paid by respondent to GTRC, the CTA En
Banc fully agreed with the disposition of the CTA Division, ruling that the net capital
gain received by GTRC was not subject to Philippine income tax.32 Undaunted,
petitioner filed a motion for reconsideration,33 which was, however, denied in a
Resolution34 dated January 5, 2015; hence, this petition.

The Issues Before the Court

4
The issues raised by petitioner in this case are: (a) whether or not the judicial claim
of respondent should be dismissed for non-exhaustion of administrative remedies;
and (b) whether or not the CTA En Banc correctly ruled that the gain derived by
GTRC was not subject to 15% FWT on dividends.

The Court's Ruling

The petition is devoid of merit.

I.

At the onset, petitioner contends that by filing the administrative and judicial claims
only 13 days apart, respondent, in effect, pursued an empty remedy before the BIR,
and thereby deprived the latter of the opportunity to ascertain the validity of the
claim. In this regard, petitioner maintained that the mere filing of the administrative
claim before the BIR did not outrightly satisfy the requirement of exhaustion of
administrative remedy.35chanrobleslaw

The contentions are untenable.

Section 229 of the Tax Code states that judicial claims for refund must be filed
within two (2) years from the date of payment of the tax or penalty, providing
further that the same may not be maintained until a claim for refund or credit has
been duly filed with the Commissioner of Internal Revenue (CIR), viz.:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or
proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessively or
in any manner wrongfully collected, until a claim for refund or credit has been
duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or

5
duress.

In any case, no such suit or proceeding shall be filed after the expiration
of two (2) years from the date of payment of the tax or penalty regardless
of any supervening cause that may arise after payment x x x. (Emphases
and underscoring supplied)
Verily, the primary purpose of filing an administrative claim was to serve as a notice
of warning to the CIR that court action would follow unless the tax or penalty
alleged to have been collected erroneously or illegally is refunded. To clarify, Section
229 of the Tax Code – [then Section 306 of the old Tax Code] – however does not
mean that the taxpayer must await the final resolution of its administrative claim for
refund, since doing so would be tantamount to the taxpayer's forfeiture of its right
to seek judicial recourse should the two (2)-year prescriptive period expire without
the appropriate judicial claim being filed. In CBK Power Company, Ltd. v. CIR,36 the
Court enunciated:
In the foregoing instances, attention must be drawn to the Court's ruling in P.J.
Kiener Co., Ltd. v. David (Kiener), wherein it was held that in no wise does the
law, i.e., Section 306 of the old Tax Code (now, Section 229 of the NIRC), imply
that the Collector of Internal Revenue first act upon the taxpayer's claim,
and that the taxpayer shall not go to court before he is notified of the
Collector's action. In Kiener, the Court went on to say that the claim with the
Collector of Internal Revenue was intended primarily as a notice of
warning that unless the tax or penalty alleged to have been collected
erroneously or illegally is refunded, court action will follow x x
x.37 (Emphases and underscoring supplied)
In the case at bar, records show that both the administrative and judicial claims for
refund of respondent for its erroneous withholding and remittance of FWT were
indubitably filed within the two-year prescriptive period.38 Notably, Section 229 of
the Tax Code, as worded, only required that an administrative claim should first be
filed. It bears stressing that respondent could not be faulted for resorting to court
action, considering that the prescriptive period stated therein was about to expire.
Had respondent awaited the action of petitioner knowing fully well that the

6
prescriptive period was about to lapse, it would have resultantly forfeited its right to
seek a judicial review of its claim, thereby suffering irreparable damage.

Thus, in view of the aforesaid circumstances, respondent correctly and timely sought
judicial redress, notwithstanding that its administrative and judicial claims were filed
only 13 days apart.

II.

For another, petitioner asserts that the net capital gain derived by GTRC from the
redemption of its 3,729,216 preferred shares should be subject to 15% FWT on
dividends; She claims that while the payment of the original subscription price could
not be taxed as it represented a return of capital, the additional amount, however,
or the component of the redemption price representing the amount of
P97,732,314.00 should not be treated as a mere premium and part of the
subscription price, but as accumulated dividend in arrears, and, hence, subject to
15% FWT.39chanrobleslaw

Again, the assertions are wrong.

The imposition of 15% FWT on intercorporate dividends received by a non-resident

foreign corporation is found in Section 28 (B) (5) (b) of the Tax Code which reads:
SEC. 28. Rates of Income Tax on Foreign Corporations. –

xxxx

(B) Tax on Nonresident Foreign Corporation. –

xxxx

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –

7
(b) Intercorporate Dividends. – A final withholding tax at the rate of fifteen
percent (15%) is hereby imposed on the amount of cash and/or property
dividends received from a domestic corporation, which shall be collected
and paid as provided in Section 57 (A) of this Code, subject to the condition
that the country in which the nonresident foreign corporation is domiciled, shall
allow a credit against the tax due from the nonresident foreign corporation taxes
deemed to have been paid in the Philippines equivalent to twenty percent (20%),
which represents the difference between the regular income tax of thirty-five
percent (35%) and the fifteen percent (15%) tax on dividends as provided in this
subparagraph: Provided, That effective January 1, 2009, the credit against the tax
due shall be equivalent to fifteen percent (15%), which represents the difference
between the regular income tax of thirty percent (30%) and the fifteen percent
(15%) tax on dividends;

xxxx (Emphasis and underscoring supplied)

It must be noted, however, that GTRC is a non-resident foreign corporation,
specifically a resident of the US. Thus, pursuant to the cardinal principle that treaties
have the force and effect of law in this jurisdiction,40 the RP-US Tax Treaty
complementarily governs the tax implications of respondent's transactions with
GTRC.

Under Article 11 (5)41 of the RP-US Tax Treaty, the term "dividends" should be
understood according to the taxation law of the State in which the corporation
making the distribution is a resident, which, in this case, pertains to respondent, a
resident of the Philippines. Accordingly, attention should be drawn to the statutory
definition of what constitutes "dividends," pursuant to Section 73 (A)42 of the Tax
Code which provides that "[t]he term 'dividends' x x x means any distribution
made by a corporation to its shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in other property."

In light of the foregoing, the Court therefore holds that the redemption price
representing the amount of P97,732,314.00 received by GTRC could not be treated

8
as accumulated dividends in arrears that could be subjected to 15% FWT. Verily,
respondent's AFS covering the years 2003 to 2009 show that it did not have
unrestricted retained earnings, and in fact, operated from a position of
deficit.43Thus, absent the availability of unrestricted retained earnings, the
board of directors of respondent had no power to issue
dividends.44 Consistent with Section 73 (A) of the Tax Code, this rule on dividend
declaration – i.e., that it is dependent upon the availability of unrestricted retained
earnings – was further edified in Section 43 of The Corporation Code of the
Philippines45 which reads:
Section 43. Power to Declare Dividends. – The board of directors of a stock
corporation may declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided, That
any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be issued without the approval
of stockholders representing not less than two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called for the purpose.

x x x x (Emphasis and underscoring supplied)

It is also worth mentioning that one of the primary features of an ordinary dividend
is that the distribution should be in the nature of a recurring return on stock 46 which,
however, does not obtain in this case. As aptly pointed out by the CTA En Banc, the
amount of P97,732,314.00 received by GTRC did not represent a periodic
distribution of dividend, but rather a payment by respondent for the redemption 47 of
GTRC's 3,729,216 preferred shares. In Wise & Co., Inc. v. Meer:48
The amounts thus distributed among the plaintiffs were not in the nature
of a recurring return on stock — in fact, they surrendered and relinquished
their stock in return for said distributions, thus ceasing to be stockholders of
the Hongkong Company, which in turn ceased to exist in its own right as a going

9
concern during its more or less brief administration of the business as trustee for the
Manila Company, and finally disappeared even as such trustee.
"The distinction between a distribution in liquidation and an ordinary dividend
is factual; the result in each case depending on the particular circumstances of the
case and the intent of the parties. If the distribution is in the nature of a
recurring return on stock it is an ordinary dividend. However, if the
corporation is really winding up its business or recapitalizing and
narrowing its activities, the distribution may properly be treated as in
complete or partial liquidation and as payment by the corporation to the
stockholder for his stock. The corporation is, in the latter instances, wiping out all
parts of the stockholders' interest in the company * * * ." (Montgomery, Federal
Income Tax Handbook [1938-1939], 258 x x x)49 (Emphases and underscoring
supplied)
All told, the amount of P97,732,314.00 received by GTRC from respondent for the
redemption of its 3,729,216 preferred shares were not accumulated dividends in
arrears. Contrary to petitioner's claims, it is therefore not subject to 15% FWT on
dividends in accordance with Section 28 (B) (5) (b) of the Tax Code.

WHEREFORE, the petition is DENIED. The Decision dated August 14, 2014 and
the Resolution dated January 5, 2015 of the Court of Tax Appeals En Banc in C.T.A.
EB No. 1041 are hereby AFFIRMED.

SO ORDERED.chanRoblesvirtualLawlibrary

Leonardo-De Castro, Acting Chairperson, Bersamin, Jardeleza,* and Caguioa,

JJ., concur.

Endnotes:

*
Designated as Additional Member per Raffle dated July 25, 2016.

1
Rollo, pp. 9-23.

10
2
Id. at 25-52. Penned by Associate Justice Esperanza R. Fabon-Victorino with
Presiding Justice Roman G. Del Rosario and Associate Justices Juanito C. Castañeda,
Jr., Erlinda P. Uy, Caesar A. Casanova, Cielito N. Mindaro-Grulla, Amelia R.
Cotangco-Manalastas, and Ma. Belen M. Ringpis-Liban concurring.

3
Id. at 53-56. Penned by Associate Justice Esperanza R. Fabon-Victorino with
Presiding Justice Roman G. Del Rosario and Associate Justices Juanito C. Castañeda,
Jr., Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, Cielito N. Mindaro-Grulla,
Amelia R. Cotangco-Manalastas, and Ma. Belen M. Ringpis-Liban concurring.

3
Id. at 63-104. Penned by Associate Justice Cielito N. Mindaro-Grulla with Associate
Justices Juanito C. Castaneda, Jr. and Caesar A. Casanova concurring.

4
Resolved by the CTA Special Second Division.

5
Id. at 105-107.

6
Id. at 63-64.

7
Id. at 64.

8
Id. at 64-65.

9
Entitled "CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF THE
PHILIPPINES AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA WITH
RESPECT TO TAXES ON INCOME," which entered into force on October 16, 1982.

10
Rollo, p. 65.

11
Id. at 84-85.

11
12
Id. at 28 and 66-70.

13
Id. at 63-104.

14
Id. at 103-104.

15
Id. at 87-88.

16
SEC. 28. Rates of Income Tax on Foreign Corporations. –

x x x x

(B) Tax on Nonresident Foreign Corporation. –

xxxx

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –

xxxx

(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. – A
final tax at the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation, except shares sold, or disposed of
through the stock exchange:

chanRoblesvirtualLawlibrary

Not over P100,000 ............................................ 5%

On any amount in excess of P100,000 ................ 10%

(See also id. at 93-94.)

12
17
Id. at 94.

18
Article 14 of the RP-US Tax Treaty states:

chanRoblesvirtualLawlibrary
Article 14
CAPITAL GAINS

1. Gains from the alienation of tangible personal (movable) property

forming part of the business property of a permanent establishment
which a resident of a Contracting State has in the other Contracting
State or of tangible personal (movable) property pertaining to a fixed
base available to a resident of a Contracting State in the other
Contracting State for the purpose of performing independent personal
services, including such gains from the alienation of such a permanent
establishment (alone or together with the whole enterprise) or of such
a fixed base, may be taxed in the other State. However, gains derived
by a resident of a Contracting State from the alienation of ships,
aircraft or containers operated by such resident in international traffic
shall be taxable only in that State, and gains described in Article 13
(Royalties) shall be taxable only in accordance with the provisions of
Article 13 (Royalties).

2. Gains from the alienation of any property other than those mentioned
in paragraph 1 or in Article 7 (Income from Real Property) shall be
taxable only in the Contracting State of which the alienator is a
resident.

(See also id. at 94.)

19
Id. at 95

20
"Principally" means more than 50% of the entire assets in terms of value. See id.

13
at 96.

21
Id. at 91-97.

22
(b) Intercorporate Dividends. – A final withholding tax at the rate of fifteen
percent (15%) is hereby imposed on the amount of cash and/or property dividends
received from a domestic corporation, which shall be collected and paid as provided
in Section 57 (A) of this Code, subject to the condition that the country in which the
nonresident foreign corporation is domiciled, shall allow a credit against the tax due
from the nonresident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%), which represents the difference
between the regular income tax of thirty-five percent (35%) and the fifteen percent
(15%) tax on dividends as provided in this subparagraph: Provided, that effective
January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent
(15%), which represents the difference between the regular income tax of thirty
percent (30%) and the fifteen percent (15%) tax on dividends;
(See also id. at 97-98)

23
Id. at 98.

24
SEC. 73. Distribution of Dividends or Assets by Corporations. –

(A) –Definition of Dividends. – The term ''dividends" when used in this Title means
any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property.

Where a corporation distributes all of its assets in complete liquidation or dissolution,

the gain realized or loss sustained by the stockholder, whether individual or
corporate, is a taxable income or a deductible loss, as the case may be.
(See also id. at 99.)

25
cralawred Id. at 97-100.

14
26
SEC. 73. Distribution of Dividends or Assets by Corporations. –

x x x x

(B) Stock Dividend. – A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax. However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the
extent that it represents a distribution of earnings or profits. (See also id. at 101.)

27
Id. at 101-102.

28
Not attached to the rollo.

29
Rollo, pp. 105-107.

30
Not attached to the rollo.

31
Rollo, pp. 25-52.

32
Id. at 35-50.

33
Not attached to the rollo.

34
Rollo, pp. 53-56.

35
Id. at 17.

36
G.R. Nos. 193383-84 & 193407-08, January 14, 2015, 746 SCRA 93.

15
37
Id. at 110-111; citation omitted.

38
Date of payment was November 3, 2008, while the administrative and judicial
claims were respectively filed on October 21, 2010 and November 3, 2010. Rollo, pp.
27-28.

39
Id. at 14-17.

40
Deutsche Bank AG Manila Branch v. CJR, 716 Phil. 676, 686 (2013).

41
Article 11 (5) of the RP-US Tax Treaty reads:

chanRoblesvirtualLawlibrary
Article 11
Dividends
xxxx

5. The term "dividends" as used in this Convention means income from shares,
mining shares, founders' shares or other rights, not being debt-claims, participating
in profits, as well as income from other corporate rights assimilated to income from
shares by the taxation law of the State of which the corporation making the
distribution is a resident. (See id. at 98.)

42
Section 73 (A) of the Tax Code states:

chanRoblesvirtualLawlibrarySEC. 73. Distribution of Dividends or Assets by

Corporations. –

(A) Definition of Dividends. – The term "dividends" when used in this

Title means any distribution made by a corporation to its shareholders out
of its earnings or profits and payable to its shareholders, whether in

16
money or in other property.

Where a corporation distributes all of its assets in complete liquidation or dissolution,

the gain realized or loss sustained by the stockholder, whether individual or
corporate, is a taxable income or a deductible loss, as the case may be. (Emphases
and underscoring supplied)

43
Rollo, p. 118.

44
See Crucillo v. Office of the Ombudsman, 552 Phil. 699, 624 (2007);and Republic
Planters Bank v. Agana, Sr., 336 Phil. 1, 9-11 (1997).

45
Batas Pambansa Bilang 68 (May 1, 1980).

46
See Wise & Co., Inc. v. Meer, 78 Phil. 655 (1947).

47
"Redemption is repurchase, a reacquisition of stock by a corporation which issued
the stock in exchange for property, whether or not the acquired stock is cancelled,
retired or held in the treasury." (CIR v. Court of Appeals, 361 Phil. 103, 124 (1999);
citations omitted.)

48
Supra note 46.

49
Id. at 669.

17